by Zviki Ben-Ishay, CEO of Lightico
The COVID-19 pandemic is less than two years old and yet already “everything is different after the pandemic” has become a cliche. So it goes without saying that “everything” absolutely includes banking. COVID changed the way we earn our money and spend our money, so it stands to reason the ways we save and invest our money must change as well. Those banks and fiduciary organizations best able to adapt to these new changes will see the least upheaval as we find our new normal, and lead the way for the whole banking industry to evolve and properly serve its clients both during and after the crisis. But to do so, they must recognize how trends in banking point toward usability and convenience and away from branches and fees.
When the COVID-19 pandemic struck, many experts predicted spooked consumers and investors would begin a “flight to quality,” shifting their assets from smaller banks and neobanks to bigger banks that would seem safer bets to weather the crisis. “Quality” here is a polite way of saying “too big to fail” — in the event COVID caused a proper crash like in 2007, the big banks are more likely to receive a government bailout, theoretically making money safer in an organization that stands no real chance of going under. Of course the more people’s money pours into those banks, the more this becomes a self-fulfilling prophecy.
At first, this prediction proved true. Big banks enjoyed notably increased deposits when the pandemic was first gathering steam. But as consumers began to realize what the pandemic and self-quarantine really entailed, those same big banks found one of their primary selling points — their physical branches — to be a major weakness.
Banking branches have always been more popular among older consumers, who prefer the face-to-face interaction and sense of stability offered by a physical location with the comforting trappings of a fiduciary organization. Being older, they generally had trouble switching to mobile banking, which has been steadily on the rise with younger consumers, most of whom avoid going to branches in person whenever possible. With mobile checking becoming easier and fewer businesses using cash-only payment models, the need to even visit an ATM has all but disappeared.
The convenience of online banking is exactly what bodes so ill for the big banks’ post-pandemic future. Stuck at home for their health, older consumers and other people who preferred in-person banking have been forced to switch to an online model. And evidence shows they plan to stick with it even after COVID is dealt with. For many people, the barrier for online banking is perceived usability, but because online banking is now so streamlined and convenient (many banking apps require a facial scan instead of a password to access), the sheer usability is outperforming the need to go visit a bank and stand in line just for that personal interaction and shot of nostalgia (which, without that usability barfrier, are really all a branch offers.)
With people abandoning in-person banking, physical branches suddenly shift from a necessity to keep the business of certain demographics to outright liabilities. Maintaining each branch is expensive, often costing in the high six figures each per annum. To maintain this existing real-estate, bigger banks must charge fees for overdrafts, low account balances, and just basic services, which can account for 40% of revenue. And these fees disproportionately target economically disadvantaged populations, including many elderly consumers, who are switching to neobanks who charge no fees because they have no physical branches to maintain. Suddenly these magnets for traditional banking customers have become expensive albatrosses around the big banks’ necks.
So while some accounts shifted to big banks early on in the crisis, as the pandemic winds down (albeit far too slowly) the banking landscape is shifting away from older organizations with legacy infrastructure. Being stuck indoors has forced even bank branch devotees to switch to online banking, which advantages the neobanks, whose lack of fees to support that infrastructure makes them stickier to new users. So while there was a short-term “flight to quality,” the long-term “migration to convenience” caused by the pandemic will end up changing the face of banking forever. And just like the transition to working from home may be a rare silver lining of convenience and independence for workers in the wake of COVID’s horrors, the end of physical branches and the shift to fee-free online banking is ultimately a blessing for consumers.
[Bio for Zviki]
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